Many homeowners in the United States watched the value of their property appreciate more than fifteen percent last year. Many of these homeowners are tempted to cash in this equity for a wide variety of reasons. It is important to borrow smartly or your newfound windfall could end up costing you. Here is what you need to know to manage your equity smartly and avoid common mistakes. If you are considering using your equity to repair or remodel your home, this is a savvy reason to borrow against your equity because it will improve the value of your home. By the same reasoning, consolidating your high interest debt using equity is also a smart move. Borrowing against your home is a good idea to eliminate your debt in this case, not clear it out for more. Home equity loans do not give you free money; while the equity you have in your home belongs to you, the money you borrow belongs to the mortgage lender. Any equity you borrow against is secured by your home just like your primary mortgage. Fall behind on your payments and the lender will take your home to repay the debt. When you borrow against equity it is important to leave yourself a cushion to protect yourself against economic uncertainty. The rule of thumb is to preserve at least 20-25% of your homes appraised value in equity. If you borrow more than this you risk owing more to a mortgage lender than your home is worth should the economy go south and take home values with it. To learn more about savvy uses for equity, refinancing your mortgage, and avoiding common homeowner mistakes, register for a free mortgage guidebook using the links below. |
